No One Would Listen: A True Financial Thriller (23 page)
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Authors: Harry Markopolos
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Investigating Bernie Madoff, as well as the work I had started doing on the market-timing cases, convinced me I could be successful at fraud investigation. And I was enjoying it. When I had started looking at Wall Street through my fraud lens, I realized how much of the business was based on deception and outright fraud. Those people who work in the industry know it is not pretty. There were times I would watch the television commercials for some of the large funds and just sit there shaking my head in disbelief. The fantasy they were selling had absolutely nothing to do with reality as I knew it to be. It isn’t every person or every firm, but the dishonesty is widespread and there is little the honest majority in the industry can do about the corrupt minority without the assistance of local, state, and federal agencies. And that support just doesn’t exist.
I was confident I knew how to weed out those frauds. My derivatives background gave me the math skills to look closely at pitch books, annual reports, and other public documents and pick them out. And I also knew there was enough fraud ingrained in the business practices of the finance industry that I wanted to be on the other side.
I discussed this at length with Faith. While the thought of losing the security of my paycheck made her very nervous, she told me simply and directly, “If you’re not happy doing what you’re doing, you shouldn’t be doing it.” We both knew that if I did this we would have to live on the money I’d managed to save, but we’d be depending mostly on her paycheck until I was able to settle some cases. I was confident that would happen pretty quickly, but there were no guarantees. Fortunately, Faith was doing very well in her career, working as a senior analyst at a very large Boston-based mutual fund company. Leaving Rampart meant we would have to survive for at least a little while on one Wall Street salary, but we finally decided it was time. Fortunately for us, we had always lived well below our means, had bought an affordable home with only a small mortgage payment, owned both of our cars, and had no debt otherwise to worry about. Thanks to our years of living frugally and wise investing, financially we could afford for me to start a new career.
When I had first casually examined Madoff’s split-strike strategy five years earlier, there was no way I could have imagined the twists it would take—or that it would lead directly to the end of my career as a derivatives portfolio manager.
In May 2004, I gave notice at Rampart and offered to stay until the end of October, giving the firm ample time to find and train a suitable replacement. I felt great loyalty to that company. I’d been there almost 13 years, and I appreciated everything my employer had done for me. I explained that I had been investigating fraud cases for some time, although I certainly never mentioned Madoff. I’d discovered there were a lot of frauds being perpetrated on investors, and thanks to my years at Rampart I had the tools, the experience, and the knowledge to stop them. At least some of them. They were gracious about it. I recommended my successor, a really smart guy named Nick Penna, and in mid-August they hired him. And two weeks later, on the last day of August, they surprised me by informing me that it was my last day.
But I’d prepared for that months earlier, gradually taking home anything personal that I would need. What was left was already stored and ready to be moved. Truthfully, like any good geek I am a little germ phobic. I’m not obsessive, just aware. At Rampart I always kept a bottle of rubbing alcohol and cotton swabs in my desk, and occasionally I’d wipe down my keyboard, mouse, and phone. George Devoe, our late senior investment officer, used to get colds, and he’d sneeze or cough without covering his mouth or nose. The last thing I did on my last day was take out my rubbing alcohol and carefully swab down my keyboard, mouse, and phone. Then I walked out the door into my new life.
I wasn’t the only member of our team looking for new challenges in 2004. Frank Casey’s job with Parkway Capital had prevented him from sailing, the passion that had been the bond between him and Thierry de la Villehuchet. During the week, he and his wife Judy lived in Freehold, New Jersey, returning to Boston each weekend. So when a close friend, Kevin Leary, invited him to sail from Boston to Bermuda on the 38-foot
Sennen,
he happily accepted. The third member of the crew was a bulky Russian woman who had responded to Kevin’s Internet ad for a cook/crew member, claiming to be a medical doctor with considerable ocean sailing experience.
Sennen,
he happily accepted. The third member of the crew was a bulky Russian woman who had responded to Kevin’s Internet ad for a cook/crew member, claiming to be a medical doctor with considerable ocean sailing experience.
The
Sennen
sailed out of Boston Harbor on July 31. As they left, for the first time in their 24 years together, Frank’s wife Judy cried—and asked where the insurance policies were kept. That seemed odd. Kevin and Frank had responsibly checked all the weather patterns before departing and saw nothing to raise any concern. But as they sailed through calm waters the first few days, Frank began having doubts about the cook, who didn’t seem to know how to correctly set the sails and wasn’t familiar with certain medical terms. It didn’t seem to matter too much, though; for a six-day sail it shouldn’t cause any problems.
Sennen
sailed out of Boston Harbor on July 31. As they left, for the first time in their 24 years together, Frank’s wife Judy cried—and asked where the insurance policies were kept. That seemed odd. Kevin and Frank had responsibly checked all the weather patterns before departing and saw nothing to raise any concern. But as they sailed through calm waters the first few days, Frank began having doubts about the cook, who didn’t seem to know how to correctly set the sails and wasn’t familiar with certain medical terms. It didn’t seem to matter too much, though; for a six-day sail it shouldn’t cause any problems.
On the third day out, a weather fax reported that a tropical storm had formed off the coast of Florida and was moving northeast up the coast. They decided to continue toward Bermuda, sailing across the Gulf Stream and using it as a warm-water shield to shelter them from the storm. But it was vital to get across it before the storm hit. As Frank knew, “Strong winds blowing against this vast current of water produce tremendous waves with flat sides like a barn wall.... Picture a bowling alley with the storm being the ball; you do not want to be the pins. Sailors know they might survive a hurricane in open ocean, but would likely die if caught by one in the Gulf Stream.”
Late in the afternoon of the third day, they learned that the tropical storm had grown into the first hurricane of the season, Hurricane Alex, and was moving northeast much faster than initial estimates. It was moving directly toward their position. To survive, they were going to have to race through the night, away from Bermuda, toward Africa.
By this point it was obvious the Russian cook had little sailing experience. She was told to stay below and secure the cabin to prevent projectiles from flying if they were hit by a wave. Frank and Kevin spent the night in the cockpit, handing off the tiller every 15 minutes, “being beaten to death in a wild mouse ride in storm-tossed seas.... Any slip of concentration could mean disaster.” By the afternoon they had put 200 miles between their position and Hurricane Alex’s track. They were going to be three or four days late to Bermuda, but they had successfully skirted the hurricane. For the first time in two days, they breathed easily.
As the captain’s log reads: “Later that evening, around 9 P.M. Boston,
Sennen
was knocked over by one enormous rogue wave.... Seawater gushed past the closed but submerged companionway hatch. This seawater immediately ruined much of the boat’s electrical system, including all three radios, navigational computer, electrical monitor and inverter, and the GPS. The rogue wave also crushed the fiberglass dingy and disabled both the monitor and auto-helm steering devices. In addition, the wave forced seawater into the fuel tanks ... making the engine inoperative.”
Sennen
was knocked over by one enormous rogue wave.... Seawater gushed past the closed but submerged companionway hatch. This seawater immediately ruined much of the boat’s electrical system, including all three radios, navigational computer, electrical monitor and inverter, and the GPS. The rogue wave also crushed the fiberglass dingy and disabled both the monitor and auto-helm steering devices. In addition, the wave forced seawater into the fuel tanks ... making the engine inoperative.”
Frank had been resting in the cabin when the wave hit. Later he estimated it to be 60 feet high or higher. He went flying through the air as water rushed around the gangway hatch boards.
My God,
he thought,
we’re under water.
As he eventually told me, “We snapped back as the keel righted the boat, and I flew back across the cabin into the starboard cabinetry. All I could hear was the cook screaming.”
My God,
he thought,
we’re under water.
As he eventually told me, “We snapped back as the keel righted the boat, and I flew back across the cabin into the starboard cabinetry. All I could hear was the cook screaming.”
The wave had picked up the boat, then smashed it down vertically through the water like a falling knife. The electronics and engine were dead. The fuel and drinking water had been polluted by sea water. For Frank, the threat was real and immediate. In this life-and-death struggle, Bernie didn’t exist.
The
Sennen
was still seaworthy, so they set sail and decided to try to reach Bermuda. But they were not going to make it. “I was on watch late in the evening,” Frank recalled. “Suddenly the wind died and I whispered a curse to myself.... I heard a freight train bearing down as I moved to face the onslaught: a white squall? Even in the dark I knew I was hearing a vertical wind-driven wall of rain; it hit, [and]
Sennen
took off like a spooked horse.”
Sennen
was still seaworthy, so they set sail and decided to try to reach Bermuda. But they were not going to make it. “I was on watch late in the evening,” Frank recalled. “Suddenly the wind died and I whispered a curse to myself.... I heard a freight train bearing down as I moved to face the onslaught: a white squall? Even in the dark I knew I was hearing a vertical wind-driven wall of rain; it hit, [and]
Sennen
took off like a spooked horse.”
Again, they survived; somehow the
Sennen
had remained afloat. But a day later they were hit again, this time by a monster wave. “We slid sideways down this monster’s front,” and again, somehow, the
Sennen
remained seaworthy. There was little more they could do. They were exhausted, running out of supplies, and having to deal with the hysterical cook, who screamed in fear through the nights. Their options were very limited; with no ability to get weather information, they had to decide whether to risk the long sail to Bermuda on a badly wounded boat or trigger the emergency position-indicating radio beacons (EPIRBs). Although they were reluctant to risk the lives of others, they decided they had no other options. They turned on the emergency beacon, reaching into the night for help.
Sennen
had remained afloat. But a day later they were hit again, this time by a monster wave. “We slid sideways down this monster’s front,” and again, somehow, the
Sennen
remained seaworthy. There was little more they could do. They were exhausted, running out of supplies, and having to deal with the hysterical cook, who screamed in fear through the nights. Their options were very limited; with no ability to get weather information, they had to decide whether to risk the long sail to Bermuda on a badly wounded boat or trigger the emergency position-indicating radio beacons (EPIRBs). Although they were reluctant to risk the lives of others, they decided they had no other options. They turned on the emergency beacon, reaching into the night for help.
It was about 10 hours later that the Coast Guard C130 cargo plane found them. The pilot dropped a radio, and arrangements were made for the crew to be rescued by the tanker
Golar Freeze,
then about a half hour away. Climbing aboard that massive ship from a small sailboat in high rolling seas without being crushed between the two ships proved as dangerous as the storms. Kevin and the cook had to be hauled the 90 feet to the tanker’s deck by a cargo net held by the crew. But eventually they all made it.
Golar Freeze,
then about a half hour away. Climbing aboard that massive ship from a small sailboat in high rolling seas without being crushed between the two ships proved as dangerous as the storms. Kevin and the cook had to be hauled the 90 feet to the tanker’s deck by a cargo net held by the crew. But eventually they all made it.
As Frank concluded, “Three months after we abandoned
Sennen
she was located in the Sargasso Sea ... still attached to a drogue to slow her movement and drifting one-half mile per hour toward Europe. After being battered by the seas and
Golar Freeze,
her value was dubious and no one would bother salvaging her. She was left to her fate, bobbing in an area of the ocean where few would ever go. I cried when I saw pictures of her. I felt like I had left a great wounded friend out in a storm.
Sennen
had kept us alive, and now she would die alone.”
Sennen
she was located in the Sargasso Sea ... still attached to a drogue to slow her movement and drifting one-half mile per hour toward Europe. After being battered by the seas and
Golar Freeze,
her value was dubious and no one would bother salvaging her. She was left to her fate, bobbing in an area of the ocean where few would ever go. I cried when I saw pictures of her. I felt like I had left a great wounded friend out in a storm.
Sennen
had kept us alive, and now she would die alone.”
While Frank was battling nature, I had begun my career fighting a much more subtle enemy. I had become a full-time fraud investigator—a financial detective. Faith and I were taking a big gamble on my ability to find massive cases of fraud, collect evidence, and prove to the government that a financial crime had taken place. I wasn’t interested in going after any particular person or group. I was living with the fear generated by the Madoff case, and I wasn’t interested in putting my whistleblowers in a similar situation.
Eventually I took all my documents proving 20 cases of market timing and submitted them to the SEC under its bounty program. I was fully aware that the SEC has the option of either accepting a case for further investigation or rejecting it. It receives hundreds of thousands of submissions annually, and it doesn’t even have a system in place to process whistleblower tips. It was a beauty contest to see who uncovers the most evil schemes. My cases were competing against all the other submissions that the SEC received. But I had a great deal of confidence in the quality of the cases that I presented.
Essentially, the SEC turned down all of my cases the same day that I submitted them. I was appalled. I had handed over evidence proving that companies had stolen billions of dollars from investors, and the SEC had responded that it was okay—the companies were not going to do it again. In one instance, one of the nation’s five largest mutual fund companies had monthly turnover percentages in its international equity funds in the 1,100 to 1,300 percent range per month! Now, there is absolutely no way on earth that those were legitimate trades done by honest buy-and-hold long-term investors. But these SEC enforcement attorneys couldn’t have cared less. I was told by a high-ranking enforcement official at the SEC in Washington, D.C., in these words: “We’re done with market timing. The industry has gotten the message.”
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